Tax Planning

How to Qualify for the Earned Income Tax Credit

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

The Earned Income Tax Credit (EITC) is known as a refundable tax credit that applies to low and moderate-income workers. For those who have children, the amount will vary based on the number of kids placed on their tax return. For the tax year 2020, the current earned income credit ranges from $538 to $6,660. 

If you qualify for this tax credit, be sure to claim it on your tax return so you can get the most out of your tax refund. Here’s how you know whether or not you qualify.

In order to know if you qualify for EITC you have to ensure that your earned income does not exceed a certain range. Taxpayers can meet the requirements for EITC without a qualifying child if you have a child that meets all the qualifying child rules for you or your spouse if filing a joint return. Taxpayers can utilize the EITC Assistant to find out their filing status and how they can qualify.

In order to meet the standards for an EITC credit you must use one of the following statuses:

  • Married filing jointly
  • Head of household
  • Qualifying widow of widower
  • Single

For those filing married filing separately, they will not be able to claim the EITC. If you or your spouse are a nonresident alien for any part of the year, you will be unable to claim the EITC unless your filing status is married filing jointly. 

Additional 2019 income rules taxpayers must follow in order to qualify for the EITC:

  • Tax year investments must be $36,000 or less.
  • Form 2555, Foreign Earned Income, Form 2555-EZ, and Foreign Earned Income Exclusion can’t be filed.
  • Total earned income must be at least $1.

If you need tax help, contact us for a free consultation.

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How To File Taxes For The Unemployed : 10 tax Tips

If you lose your job unexpectedly, your first reaction may be to panic. Your second reaction may be to despair about whether you will ever work again. Unemployment brings many challenges and money considerations. What you may not consider are the implications for federal and state income taxes. But you will have to deal with your taxes sooner or later. Fortunately, the IRS provides tax breaks that may ease the blow of losing your job and make the task of seeking a new job easier. Here is everything you need to know about filing taxes unemployed.

How Do You File Taxes if You Don’t Work?

1. Don’t Forget to File Your Return

This may seem painfully obvious, but in your efforts to deal with reduced (or no) income, resumes and job interviews, tasks like filing your income tax return can be shoved to the side. You still need to be filing taxes unemployed. Depending on how long you’ve been unemployed, you may qualify for a sizeable tax refund, which would provide much needed cash. If you lose your job right before the filing deadline, and you really just can’t handle filing a return, file a request for an automatic extension to give yourself an extra six months. But don’t forget to pay at least an estimated amount of taxes that you owe to avoid underpayment penalties. If you’ve got some time to plan before you file then be sure to research the benefits and tax credits that may be available to you.

2. Utilize Free Income Tax Filing Services

If you never took advantage of free tax filing services before, now is the time to check out this benefit. The IRS allows taxpayers with adjusted gross incomes under a certain amount ($58,000 for 2013 tax returns) to file their federal returns for no charge through the Free File program. Many states also allow taxpayers to file their income taxes for free. Depending on your circumstances, you may also qualify for face-to-face assistance in filing your income tax returns from nonprofit agencies in your area.

3. Keep Track of Job Search Expenses

If you always just take the standard deduction on your return, you may wish to reconsider that position when filing taxes unemployed. That’s because job search expenses for a position in your present line of work are tax-deductible, but only if you itemize your deductions. Job search expenses must exceed 2 percent of your adjusted gross income to be deductible, but if you are receiving unemployment or no income at all, this hurdle is relatively easy to overcome. Expenses such as printing and mailing resumes, travel expenses for job interviews, employment agency fees and career counseling add up quickly.

4. Medical Expenses May be Tax Deductible

Clearing the hurdle of 7.5 percent of adjusted gross income necessary to deduct medical expenses is ordinarily a tall order, barring major surgery or catastrophic illness. But if your income is reduced due to job loss, clearing that hurdle may be easier. Save receipts for doctor visits, prescriptions, and over-the-counter medications just in case.

5. Take the Health Insurance Tax Credit if You Qualify

If you lost your job as a result of a foreign trade agreement, you may be able to claim the Health Insurance Tax Credit. You must be receiving Trade Adjustment Assistance benefits to qualify. The HITC covers 80 percent of your health insurance premiums, which can free up a significant amount of cash for other areas of your budget.

6. Consider Your Retirement Plan

If you have an employer-sponsored 401(K), you will need to roll those funds into a traditional IRA or other qualified retirement funds to avoid paying taxes on the money. If you already have a traditional IRA, it may make sense to convert the account to a Roth IRA while your income is lower. You will have to pay income taxes on the funds that you convert, but you may still come out ahead financially in the long term. Consult with Optima Tax Relief to determine the best strategy for you.

7. Take Advantage of Tax Breaks for Low and Moderate Income Earners

Since you lost your job, your income has likely decreased dramatically, while many of your expenses have remained the same. Tax credits like the Earned Income Tax Credit (EITC), the Child Tax Credit, Child and Dependent Care Credit and Savers Credit allow low and moderate income taxpayers to reduce the amount of income that they must declare on their federal income tax returns and in some cases, such as with the EITC, receive a tax refund, even if they don’t actually owe federal income taxes.

8. Don’t Get Blindsided by Taxes on Severance Pay or Unemployment Insurance

It is a cruel irony that unemployment insurance and severance pay are considered taxable income. As painful as it may be, plan to set aside funds from each unemployment check or your severance check to cover your estimated federal income tax liability if at all possible. The IRS receives copies of Form 1099 which reports unemployment income and Form W-2 which reports income – including severance pay – from your former job. Underreporting this income or failing to pay the taxes you owe could land you in serious trouble. The risks simply aren’t worth it. Bear this in mind when filing taxes unemployed.

9. Get to Know Schedule C

While your ultimate goal may be to find another full-time or part-time job, you may take temporary jobs or self-employment to fill gaps in your income during your search. Income and expenses from self-employment are calculated on Schedule C, which is filed along with your federal income tax return. Deductions and credits differ significantly for income from self-employed workers and small business owners than for wage earners.

Depending on how long you remain unemployed, you may be able to claim tax breaks through Schedule C that would be difficult or impossible to claim as a wage earner itemizing your deductions on Schedule A. In particular, self-employed workers can claim tax breaks on health insurance premium payments without itemizing deductions. Who knows, you may decide to ditch the job search in favor of full-time self-employment.

10. Withdraw from Your Retirement Fund Only as a Last Resort

When the balance in your bank account shrivels and your bills begin to pile up, funds that you have set aside for your kids’ education or for your retirement begin to look like a lifeline. If you are really hard up for money and you must choose between Junior’s education fund and your traditional IRA as a source of much-needed cash, deplete Junior’s college fund first. This is not to punish Junior, but because resources such as grants, scholarships, loans, and part-time work are available to help college students with financial need. If all else fails, Junior can attend a community college for a year or two before transferring to a four-year institution.

On the other hand, draining your retirement fund deprives you of funds that you may or may not be able to replenish. Even if you can replace the funds you withdraw, it is unlikely that you will ever be able to make up for the earnings that those funds would have generated had they remained in your account. Worse, you may have to pay a stiff tax penalty for early withdrawal from your traditional IRA. That said, the IRS allows unemployed taxpayers or their heirs to make hardship withdrawals from traditional IRAs before age 59 ½ without paying a tax penalty under strictly defined circumstances.

Do You Get a Tax Break For Being Unemployed?

Yes, you can get tax breaks if you’re unemployed. Taking advantage of tax breaks designed to assist job seekers and other taxpayers with moderate or reduced incomes may help you provide your family’s basic financial necessities until you are back on the job. Losing your job and going through the grind of seeking work can wear on even the most determined job seeker. While it’s tempting to give up, you should do whatever you can to continue your search. If you’re one of many American’s who lost their jobs or were furloughed in 2020 during the Covid-19 pandemic you may be eligible for additional relief. See our dedicated content for additional information on Coronavirus Tax Relief and benefits.

If you need tax help, contact one of our dedicated tax experts for a free consultation.

Taxpayers should Report Tip Income on Their Tax Return

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

Receiving additional pay on top of your income can have its benefits. No matter how you receive additional income, it needs to be reported to the IRS when you file your taxes – even tips. Here’s what you need to know to stay on the good side of the IRS.

If you receive tips worth more than $20 each month, it will be considered taxable income. These tips are also subject to Social Security and Medicare tax withholding. The average tip rate in the United States is typically 8%, and those who earn this much in tips are expected to report it to the IRS. 

If the reported tip income is less than 8%, employers are required to allocate unreported income among their employees. This is only applicable to companies that employ more than 10 employees on a typical business day. 

Taxpayers must include all tips they receive on their tax return as it is considered additional taxable income. This includes:

  • Tips directly from customers.
  • Tips added using credit cards.
  • Tips from a tip-splitting arrangement with other employees.

The IRS recommends three ways for a taxpayer to report their tip income correctly:

  • Keep a daily tip record.
  • Report tips to their employer.
  • Report all tips on their income tax return.

It is vital for taxpayers to report their tips as income to ensure that the IRS does not come back at a later date inquiring about missing income that was not reported. To learn more about how your tips should be reported on your tax return, you can visit the IRS website

If you need tax help, contact us for a free consultation.

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What is the Difference Between Form 1099-Misc and 1099-K?

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

1040 and W2 tax forms

Being self-employed comes with a lot of benefits like being your own boss and making your own hours. Although there are a lot of perks to being self-employed, there are also a lot of additional responsibilities you will have to take on that most W-2 employees don’t have to deal with. For instance, you are responsible for keeping track of all your expenses you incur throughout the tax year, tracking your mileage and maintenance associated with your work vehicle, and ensuring that you are making estimated tax payments throughout the year to avoid owing when filing your taxes.

If you are self-employed or have worked on a contract basis where no taxes were withheld from your pay, it is extremely important to understand the difference between a 1099-MISC versus a 1099-K when filing your taxes.

1099-MISC

This form is issued to independent contractors or those that are self-employed who have been paid $600 or more. If you were paid under $600, this may not trigger a 1099-MISC to be generated, however, you are still responsible for reporting all tax income that you have received throughout the tax year. It is also required to report all self-employment income if your net earnings are $400 or more. 

When a taxpayer receives their 1099-MISC form, they can also claim deductions against their income that should be listed on their schedule C. Adding any work expenses as deductions can help reduce a possible balance you may owe at the end of the tax year.

1099-K

A 1099-K, also known as a Payment Card or Third Party Network Transactions, is used by credit card companies and third-party processors like Paypal and Amazon to report payment transactions they process for retailers or other third parties. You’ll typically receive a 1099-K if you have accepted credit cards or third-party processors and also had more than $20,000 in sales as well as over 200 individual transactions through a third-party processor.

If you need tax help, contact us for a free consultation.

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Four Reasons Why You Should File a Tax Extension

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

Although all tax returns are traditionally filed on April 15, due to the coronavirus pandemic, the deadline was extended to July 15 this year. If you have yet to receive all your tax documents or are unable to make a tax appointment with your tax professional before the tax deadline, you can fill out Form 4868 and submit it to the IRS in order to be granted an extension to file your tax return. It is important to know that even if you file an extension, you must still pay your taxes owed in full by the tax deadline in order to avoid penalties. 

Here are a few additional reasons why you may need to file an extension:

  1. Unexpected life events. Even if your intention was to file your tax return before the deadline, sometimes life events will interfere with your ability to do so. If you have an unexpected death, illness, or natural disaster with you or your family, you may be unable to file. The IRS doesn’t expect taxpayers to list a reason as to why they are filing an extension but will allow you additional time to recover your tax documents and file at a later date.
  2. Incomplete tax documents. If you file an extension, it will allow you more time to review your taxes in order to ensure that your tax return is accurate. If you’ve lost any tax forms like your W-2 or 1099 that your employer sent you, you can request a copy be mailed again to you. It may also be beneficial to request an extension when waiting for additional tax information to be sent to ensure that all income has been properly reported on your tax return. It will also help you avoid having to make future corrections on your tax return.
  3. Tax laws are constantly changing. Should you choose to file a three-month extension, you might be eligible for brand new tax deductions or a change in taxpayer status. Tax laws are always changing so if you decide that you need a while longer to file your taxes it may be to your benefit.
  4. Avoid the tax filing chaos. As the tax deadline draws near, more taxpayers will be scrambling to make last minute appointments with a tax preparer to file their taxes. If you are unable to get an appointment before the tax deadline or you know that your tax return will be complex and will take time to file, consider filing for an extension and making a tax appointment after the initial tax deadline. This will help you avoid the crowds and get additional one-on-one time with a tax preparer.

If you need tax help, contact us for a free consultation.

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Is Your Hobby Considered a Business?

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

Having a hobby can sometimes make you money on the side. This extra money can be used to go shopping or put in savings. But, did you know that if the IRS deems your hobby as a business, you’ll have to report any income that you’ve earned?

Here’s how to distinguish whether you have a business or a hobby:

What’s the difference between a hobby and a business? For the most part, hobbies are considered a recreational pastime that people do. A business on the other hand is operated to earn either a profit or a loss. As a business you are also able to deduct certain expenses throughout the year that could help you receive a bigger refund or take away from a tax liability that you may owe

How can I distinguish my hobby from self-employed income? There are a few ways to understand if your hobby is more than just a hobby. One way is to ask yourself the following questions and if you say yes to any of them, your hobby could be considered a business:

  • Do I rely on this income to survive?
  • Do you intend to earn profit off your hobby and have you previously?
  • Do you expect to make a future profit off of it?
  • Are your losses a normal part of startup costs or are they due to circumstances you can’t control?

If you’re still confused even after answering the above questions, then you can refer to the IRS guidelines. If you have made a profit in three of the last five years, the IRS will consider that profit towards a business. 

Can I make tax deductions for my hobby? The answer to this is no. Under the Tax Cuts and Jobs Act, miscellaneous itemized deductions can no longer be deducted for tax years after 2017. To put it simply, it means that your hobby-related expenses do not qualify as an actual deduction.

If you need tax help, contact us for a free consultation.

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Tax Tips for People Who Are Self-Employed

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

As a 1099 earner, it can sometimes seem like there are more rules to follow when filing taxes and more responsibilities to manage compared to someone that is a W-2 earner. It can even seem confusing at times when filling out certain paperwork or figuring out how to report all your income to the IRS. 

Here are a few simple tips to help you get prepared for next tax season:

Estimate your business income. This may seem difficult to do if you have no idea where to start, but the best way to figure out how much you will be making for the tax year and how much you should be paying in estimated tax payments is by referring to your tax return from the year before. This will give you an idea on what to expect when filing your tax return and what to pay in taxes.

Organize your expenses. Don’t just leave all your receipts lying around the floor or tossed in the backseat of your car. Consider automating your expenses by using a finance software where you can digitally upload copies of receipts and that synchronizes with your bank accounts so it can view any payments that were made towards your business. This not only saves you time but prevents you from making a mistake when filing your taxes.

Track your mileage. If you’ve been using your vehicle for anything work-related, make sure to track the mileage that you are using. It’s also important to keep a record of any gas, oil, and maintenance expenses that you accrue throughout the tax years.

Take a home office deduction. The IRS created the Simplified Home Office Deduction for taxpayers that own a small business from their home. If you have a qualified home office, you can deduct some of your otherwise nondeductible expenses. Here are some expenses that you can deduct:

  1. Home insurance
  2. Utilities
  3. Rent

Forecast any future expenses in advance. Being self-employed means that it is your responsibility to purchase your own goods and equipment ahead of time in order to avoid any delays that could harm the amount of profit you receive. Forecasting your expenses ahead of time will allow you to understand how much money will need to be allocated to purchase these goods and still have enough left over to not only pay yourself but also your taxes.

If you need tax help, contact us for a free consultation.

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Am I Required to Make Estimated Tax Payments?

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

For most employees, their employer withholds taxes from their paychecks before sending the money directly to the IRS and state government. These employees don’t have to worry about having to calculate their taxes every paycheck, because it automatically comes out, which could lead to them receiving a nice refund come next tax season.

If you’re self-employed, then you know that your taxes are not automatically withheld from your paychecks. You need to calculate how much taxes need to be withheld by making estimated tax payments either monthly or quarterly. Here are a few tax tips the self-employed should follow in order to stay up to date with the IRS.

  1. Determine your business income. If you expect to be in a higher tax bracket this year, you’ll want to review what deductions you qualify for in order to reduce your income since you will most likely be subject to the highest tax rate. 
  2. Decide when you want to receive your income. Being self-employed usually means you can determine when you receive your payment for the service that you rendered. This can help you estimate how much income you will have and when you need to make your estimated tax payments in order to stay compliant. 
  3. Review what medical deductions you qualify for. Make the most out of your medical insurance deduction by deducting yourself, spouse, or any dependents you have. This will adjust your total income for the year which could help you owe less at the end of the year or even possibly receive a refund. 
  4. Understand itemized deductions vs. business deductions. It’s important to understand the difference because taking business deductions instead of itemized deductions will help you reduce your total adjusted gross income and self-employment tax for the year. 
  5. Track your business mileage. Make sure to keep all business expenses that you incur throughout the tax year such as gas, oil, vehicle maintenance as well as other expenses that may apply. Once you have kept a record of these business expenses, you can deduct it from your tax return. 

If you need tax help, contact us for a free consultation.

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Should I File an Amended Tax Return?

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

If you’ve already filed your tax return only to realize that there’s an error or you omitted pertinent information, you may need to consider amending your tax return. Here are the dos and don’ts you should follow when it comes to determining whether or not you should amend your return.

  1. You received a CP2000 notice. If you received this notice, the IRS is notifying you that they determined there is underreported income on your tax return. Don’t immediately file an amended return when you receive this notice. Instead, review the information that the IRS has provided you and see if there is something in fact missing on your return.
  2. You received an audit notice. In the event you receive this type of notice, the IRS will request you provide further information that they feel you did not prove on your tax return(s). Keep in mind that you are unable to file an amended return when you are being audited by the IRS. 
  3. The IRS rejected your e-filed return. Don’t immediately jump to the conclusion that you need to amend your return if the IRS rejects it. Instead, review all the information to ensure it is accurate (name, birthdates, social security numbers) and attempt to e-file again. The IRS typically rejects returns if they believe identity theft is occurring or if two people have claimed the same dependent. 
  4. You forgot to include additional information on your tax return. If you already filed your return with the IRS and realized that you forgot to include additional income you earned throughout that tax year, you do have the option to amend your tax return to include this additional income. This ensures that the IRS won’t send you a notice later on inquiring about the additional income that you received.  
  5. You forgot to claim a credit of deduction. The IRS offers many credits and deductions for eligible taxpayers to place on their tax return that could potentially lead to them reducing a tax balance they may have or receiving a bigger refund. If you qualify for either a credit or deduction but failed to include it on your return, you can amend your tax return to include this in order to receive the most out of your tax filing.
  6. Your employer made a mistake on your W-2. If there were errors on your W-2 form that lead to your employer having to send you a corrected W-2 form after you filed your taxes, the IRS will allow you to amend your return to include the new information.

If you need tax help, contact us for a free consultation.

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How to Make a Payment to the IRS

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

  • The IRS offers payment options for those seeking to pay down their tax liability or make estimated tax payments.
  • Taxpayers paying off their tax balance can choose to have a monthly payment directly debited from their account or make payments manually.
  • For those making estimated tax payments, the IRS offers the option to mail in your payments or pay online. 

If you’re looking to avoid paying your back taxes at the end of the tax year or you want to start paying down your tax liability but have no idea where to make payments, it may be beneficial to look into what options the IRS can provide to you in order to stay compliant and out of collections.

If you owe a tax balance to the IRS and don’t have the ability to pay it back in full right away, the IRS does provide payment plan options for you to pay on a month to month basis. 

The IRS also offers the following options to help you make your monthly payments:

Direct Debit– For those who don’t want to deal with making manual payments to the IRS every month, you can request that your monthly payment is taken out from your bank account. Once you have established an agreement with the IRS, they will request that you fill out a direct debit form, also known as a 433-D form. The form requires that you input your accounting and routing information, the name of your bank, the tax balance amount, what tax years you owed for, and a signature to confirm you are requesting the tax payment be debited out of your account. 

Manual Payments – If you’re eligible, you can request to manually make your installment agreement payments. The IRS does require that you either mail in a check, money order or cashier’s check and to make it payable to the U.S. Treasury. In addition, the IRS also requires the following when you send in your payment:

  • Your name and address
  • Social security number 
  • Employee Identification number (if applicable)
  • Daytime phone number
  • Tax year
  • IRS notice or form related to the payment (if applicable)

Depending on the state you live in, the IRS will require that you mail your payment off to a specific processing center. You can click here to see where to send your payment.

Estimated Tax Payments

If you know that you’re going to owe a tax balance at the end of the tax year or are a 1099 earner looking to avoid owing money after filing your taxes, the IRS recommends that you make estimated tax payments either monthly or quarterly. 

The IRS provides several options for those looking to make their payments:

Pay online– Taxpayers can make their estimated tax payments online if they want to avoid the hassle of having to send in their payment. You can choose to: 1)  pay in full with a debit card or a credit or 2) make monthly installment agreement payments (subject to additional fees for each payment).

Manual payments– For those that choose to submit their payments by mail, the IRS requires the same information as mentioned above for the manual installment agreement payments. Taxpayers should also keep track of every payment they have made to the IRS throughout the tax year to ensure there are no discrepancies when they file their taxes. 

If you need tax help, contact us for a free consultation.


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